Have you ever wondered why we have a Social Security system?
For most of human history, people relied on families and extended families for security in old age. But as we moved into the 20th century, families became dispersed and increasingly unreliable. As a result, people turned to government to meet a need that was not easily met in the private market place.
But why is our system designed the way it is?
What rational person would choose a system that makes promises to pay workers benefits 45 years in the future without making any provision to save and invest the funds needed to pay those benefits? What rational person would devise a system that encourages people to believe they will get benefits 45 years in the future, knowing all along that the payment of benefits depends on future taxpayersbut without knowing what the fertility rate will look like a half century later and therefore without knowing how many future taxpayers there will be? In short, what rational person would devise an entire retirement system, using the same techniques that Bernie Madoff used to scam his investors?